Rewarding employees with equity participation has become central to remuneration strategy for brokers. We explain the tax implications of the most common arrangements, to help you avoid costly misunderstandings.
As consolidation continues and private equity ownership remains widespread, businesses increasingly use shares and share options to attract and retain key employees and to align interests through value creation and exit events.
But it’s important to be aware of how the tax treatments of these incentives can vary significantly, depending on the structure. Confusion over the differences can create unexpected liabilities or undermine the intended commercial benefits. The taxation of employee equity incentives is governed by the employment-related securities rules.
Award of shares to employees
When an employee receives shares for free or at a discount, HMRC treats this discount as part of their pay, similar to a bonus. The person is normally taxed on the value of the shares on the day they receive them, minus anything they paid for them.
This usually means:
- Income Tax is due
- National insurance (NICs) may also be due
- The business may have to pay employer’s NICs
Are the shares readily convertible assets (RCAs)?
Whether National Insurance is due depends on whether the shares are RCAs. If the shares can be immediately sold – for example because the company is listed or a sale is already planned – then the employer normally has to process the award of shares through the payroll and operate PAYE and NICs on them.
Most brokers are private companies, with no open market for sale. This means shares in an ultimate parent entity are not normally RCAs. But if shares are awarded before a planned sale or exit, they may be classed as RCAs. Shares in subsidiary entities are also treated as RCAs.
What happens later when the shares are sold?
Once an employee owns the shares, any later increase in value is generally taxed under Capital Gains Tax (CGT), which can be lower than Income Tax. So this may be a real opportunity for employees hoping to benefit from an eventual sale or private equity exit.
What are the implications of restricted shares?
Most shares awarded to employees come with some form of restriction, such as forfeiture conditions or restrictions on transfer. In principle, these restrictions reduce the value of the shares, and the default position for taxation is that this is the acquisition value.
On the other hand, when these restrictions are released (or deemed to be released – for example because the employee has sold the shares and is no longer bound by them), the shares notionally increase in value, an amount that is subject to Income Tax and NICs.
In practical terms, brokers awarding shares do not attach a material (or any) reduction in value to this restriction at award. So any initial saving would be very low, but the tax consequences on sale could be significant.
This means it’s nearly always best for the employer and employee to enter into a so-called Section 431 election at the point of award. This will ensure that, although the initial acquisition value is slightly higher, the exit disposal is solely subject to CGT.
Share options: tax and other differences
Share options give employees the right to acquire shares at a fixed price in the future. They are popular because employees only become shareholders if they choose to exercise the option – often at the point of a value‑realising event like a sale. There are three types of share options for tax purposes.
Unapproved share options
Unapproved (or ‘non tax-advantaged’) options offer flexibility but are less tax efficient. Generally:
- No tax is due on grant.
- Income Tax (and possibly NICs) is due when the option is exercised on any value above the exercise price.
- Any subsequent growth is subject to CGT when the shares are sold.
As a result, share options do not trigger a tax point on day one. But the downside is that any growth in value is subject to Income Tax (and possibly NICs) until the date the options are exercised.
Enterprise Management Incentives (EMIs)
Certain businesses that meet set criteria can offer equity incentives to employees as part of set tax-advantaged schemes. EMI options are often the most attractive for smaller or fast-growing brokers. They offer significant tax advantages:
- No Income Tax or NICs on grant.
- No Income Tax or NICs on exercise of the options, where the price paid is at least equal to the market value of the shares at the date the options were granted.
- Growth in value is typically subject only to Capital Gains Tax (CGT).
- Employees may qualify for the 1% business asset disposal relief rate on exit.
EMIs require the company (and employee) to meet certain conditions. These include size, trading activity and independence. Where possible they allow businesses and employees to defer any tax liability until the options are exercised, but lock in the value at the date of grant of the option.
Company Share Option Plans (CSOPs)
In the 2025 Budget, the government announced relaxations in the eligibility criteria under the EMI scheme. But larger, more mature broker groups may still not meet these thresholds. For these business, recent rule changes have significantly increased the usefulness of CSOPs (another tax-advantaged scheme).
Key benefits include:
- Up to £60,000 of options per employee.
- Options can be granted over any class of shares, giving private companies more flexibility.
- No Income Tax or NICs on exercise if certain conditions are met (mainly the three year holding requirement).
- Gains on sale taxed under CGT.
How we can help
Choosing the best employee equity incentive for your business can be challenging. There is no one size fits all. The right choice depends on ownership structure, size, regulatory environment and long-term strategy. Above all, a clear understanding of the different tax treatments is essential, to avoid unexpected liabilities and ensure incentives operate as you intended.
For further guidance on any issues raised in this article, please contact Tom Golding.
